A forward-looking dividend ETF strategy that selects quality names more likely to raise dividends while diminishing exposure to those likely to cut payouts has been outperforming.
The Reality Shares DIVCON Leaders Dividend ETF (BATS: LEAD) has increased 15.5% year-to-date and outpaced other so-called dividend achievers that include companies with a consistent track record of growing dividends.
Eric Ervin, CEO of Reality Shares, argued that LEAD is outperforming its larger competitors because the ETF focuses on dividend growth companies rather than companies who have historically raised dividends.
“Most dividend funds only use backward-looking data to assess whether a company will grow their dividends, whereas Reality Shares uses a forward-looking approach to predict dividend raises or cuts using their proprietary DIVCON methodology,” Ervin told ETF Trends in an email.
Many of the most popular dividend growth funds are based on data of prior payouts, tracking companies that have shown a history of yield growth. There is no guarantee that history will stay the same.
Furthermore, other dividend funds focus on dividend yield, which is not a good indicator of a company’s overall health. Reality Shares research shows that dividend growth stocks historically outperform the S&P 500, whereas high yielding stocks underperform.
Alternatively, the DIVCON ETF suite tracks companies based on the dividend growth of the broad market, and also those stocks most likely to increase their dividends while avoiding and even sometimes capitalizing on those stocks more likely to reduce dividends.